WHAT IS A REPRESENTATIVE OFFICE?
The Representative Office in China (Liaison Office) is a separate legal entity that represents a foreign company in China. It is considered an inexpensive and easy method to create a legal entity, but it is often not recommended because there are many operational limitations. The company cannot participate in profit-making activities and is therefore limited to secondary business activities.
A representative office is primarily used to:
- Study the market in another territory while promoting the foreign company
- Create a contact network, gather information and develop advertisement
- Rent commercial and residential premises
- Other activities that are not intended to generate profit
In such a configuration, the representative office cannot sign contracts or bill customers. However, this form of implementation allows foreign companies to perform marketing and research activities in order to see if China is a viable option. Due to the limited operational range, the average duration of a liaison office is 2 years.
ESTABLISHMENT CONDITIONS & PROCEDURES
The parent company must submit an application to obtain a business license by filing an application with the local Administration of Industry and Commerce (AIC), followed by a recording with other competent local authorities. Some industry sectors require approvals from the appropriate regulatory authorities before the application to the AIC. The registration process of the AIC generally lasts from 3 to 4 months.
Foreign investors may find it difficult to submit the application documents directly to the authorities, believing that everything takes time, and may instead choose to hire a consulting firm to benefit from their long working relationship with local authorities as well as their procedural knowledge.
All applications must be submitted in Chinese, but they may also be written in a foreign language. The materials must be equally valid in both languages. The approval of the permit is normally issued during the month following the submission of the application.
The following documents must be included in the application to the AIC:
- Certificate of incorporation of the parent company (notarized and regularized)
- Contract of lease or purchase office space in China
Duplicate with Chinese translation:
- Application form for the establishment of a representative office
- Letter of appointment to the chief representative and all representatives abroad (including photocopies of ID Cards and resumes)
- Certification of credit capital of the parent company (notarized and regularized)
- Forms usual application of the AIC (in Chinese)
At the request of the AIC, some additional documents may be necessary.
- When the AIC issued a registration certificate for the establishment of a Representative Office, the following recording procedures must be completed within a designated turnaround time, and depending on the industry and geography.
- Register the Building/Office of the company and the official seal to the Division of Exit & Entry of the Administration Field Office of Public Safety;
- Obtain from the Technical Supervision Bureau a certificate with the code number of the organization
- Register to the local and state tax authorities and obtain certificates;
- Representative Offices are subject to a number of different taxes, depending on the business plan and location. The effective tax rate is equivalent to 11% of spending in general.
- Register to the Bureau of Statistics and obtain a certificate;
- Register to the Administration of Foreign Exchange to create an account in foreign currency;
- Open a bank account.
2. Register to the customs administration to create a customs check.
3. Submit requests for working and residence permits for foreign representatives and for hiring employees locally through a placement agency licensed by the state.
Regarding the business activities restrictions imposed on representative offices, major offenses occurred in the past and these abuses have ensured that the authorities are more stringent about the settling down permissions and to issues related to compliance with these restrictions. Monitoring is governed by the AIC and the Office of Public Safety. The liaison office can expect to receive an on-site checking during the first three months of establishment.
1. Limited Capital Investment
Setting up a Representative Office in China is cost efficient, and so there is no actual minimum share capital required.
2. Marketing Operations
Representative Office are entitled to handle market research, sourcing, project investigation for the parent company abroad.
3. Local Faculty
Can hire limited number of local staff
1.Narrow Business Operations
A Representative Office is limited in the nature of the business activities in which it can engage, cannot receive any fees for its service or engage in any profit-making activities
2. Not Included Activities:
Employing staff directly. In other words, a Representative Office must use an authorized human resources agency to hire its staff.
- Providing services to any other organization than its head office
- Soliciting, concluding or signing business contracts with any customers
- Issuing invoice in China.
- Warehousing and managing inventory in China for trading purposes
- Other business trading activities (whether direct nor conducted on behalf of the foreign parent company)
- Any activities other than of a liaison nature (such as quality control services, installation and testing services)
A Representative Office is certainly easier to open than a WFOE. The issue is that this entry mode to China carries a series of limitations. These restrictions can be inconvenient for the parent company, one major inconvenience is that the company cannot receive payment from Chinese clients; in other words, it cannot earn money in China nor perform after-sales services for a fee. Moreover, even if the company doesn’t have any profit, the Chinese government requires the payment of taxes, usually calculated as a percentage of the expenses.
One of the fastest and cheapest ways to enter China is the representative office. Companies sometimes take this method to test themselves in Asia’s giant, with the intention of switching to WFOE. Nevertheless, this approach has a big downside because you have to completely shut down the Representative Office and form a WFOE from the ground up, which will take time and lots of money.